By Charles Goodwin, Senior Director, Kiavi
New construction development is currently making waves in the real estate world by providing strategic real estate investors with an opportunity to transform forgotten or underused patches of land into vibrant, functional housing with a promising ROI.
Imagine transforming the forgotten corners of our cities into thriving communities. That’s precisely what drove Dan Magder and Greg Shron to create their real estate investment company, Center Creek Homes, five years ago. Their journey began with a vision to revive underutilized city spaces, calling for creativity and collaboration every step of the way. Today, Center Creek Homes revitalizes communities in the Richmond, VA, area with a creative and unique approach to building affordable, high-quality housing for today’s families.
As population-dense cities face housing stock shortages, infill construction offers an alternative path to creating more affordable housing by filling in the gaps in existing urban communities rather than pushing out into new suburban developments. For real estate investors interested in new construction projects, a crucial question is whether to build-to-rent or build-to-sell? Each option has its own set of pros and cons, with the right choice depending on your unique investment goals.
What is New Construction?
Infill and new construction is all about making the most of available space in urban areas. Think of it as giving a facelift to those empty lots or run-down properties scattered around the city. This type of development helps increase urban density, makes better use of existing infrastructure, and can breathe new life into neighborhoods.
Infill and new construction projects can be anything from single-family homes to larger multifamily units or even mixed-use developments. It all depends on the specific area and what makes the most sense for the land. New construction financing enables investors to acquire and build their next investment property without putting all of their own cash into the deal.
Building-to-Rent vs. Building-to-Sell
When it comes to developing new construction housing, there are two paths investors can take: building a new property within an existing community and renting it out or selling it to a homeowner. Each approach has its own benefits and challenges, and the right choice often depends on their investment goals and market conditions.
The choice between building-to-rent and building-to-sell can also depend heavily on the neighborhood in question. If the area has desirable amenities and a strong rental demand, building-to-rent might be more lucrative. On the other hand, in neighborhoods where homeownership is preferred, building-to-sell could be the better option. It’s also important to consider local zoning laws, as they can dictate what type of developments are allowed.
Why Build-to-Rent?
- Long-Term Income: One of the biggest advantages of building-to-rent is the potential for long-term income. By holding onto properties and renting them out, investors can create a steady stream of income and benefit from property appreciation over time.
- Consistent Cash Flow: Rental properties can provide a reliable monthly income, which can be especially attractive in a stable rental market.
- Inflation Hedge: Rental income tends to rise with inflation, helping to protect your investment’s value over the long term.
Build-to-Rent Considerations:
- High Upfront Costs: Building-to-rent often involves higher initial costs, especially if you’re including amenities to attract tenants.
- Management: Being a landlord comes with its own set of challenges, from ongoing maintenance to tenant communications and marketing.
- Market Fluctuations: Rental prices can be volatile. Recent years have seen growth in average monthly rent, but it depends greatly on the housing market – which has been unpredictable in recent years.
Why Build-to-Sell?
- Quick Capital Recycling: One of the major benefits of building-to-sell is the ability to quickly recycle your capital. Once you sell a property, you can reinvest the proceeds into your next project.
- High Cash-on-Cash Returns: Selling properties can provide substantial immediate returns, which can be reinvested for further growth.
- No Property Management Stress: Selling your projects means avoiding the ongoing responsibilities of property management.
Build-to-Sell Considerations:
- Market Dependency: Selling properties means you’re more exposed to market conditions. If the housing market takes a downturn, you might struggle to sell at your desired price.
- No Long-Term Income: Once you sell, you lose out on potential long-term rental income and property appreciation.
- Potential Higher Costs: To attract buyers, you might need to invest more in higher-end finishes and upgrades, which can increase your construction costs.
Deciding between building-to-rent and building-to-sell new construction projects isn’t a one-size-fits-all situation. It all boils down to your investment strategy, the specific market conditions, and the neighborhood dynamics. Whether you’re aiming for long-term wealth creation through rental income or quick returns by selling, new construction offers exciting opportunities for investors and developers looking to maximize their investments.
Charles Goodwin is a Senior Director at Kiavi, one of the nation’s largest private lenders to residential real estate investors (REIs) with over $23.5 billion in funded loans. By harnessing the power of data & technology, Kiavi offers REIs a simpler, more reliable, and faster way to access the capital they need to scale their businesses.
